System and method for automatic defeasance of a base portfolio of swaps

ABSTRACT

A computer-implemented method for automatic defeasance of a base portfolio of swaps, the base portfolio being held between a first counterpart and a second counterpart, including the steps of: receiving at a portfolio database trade data related to the base portfolio; identifying from the trade data at a matching engine trades that have at least one of matching core attributes and matching trade characteristics so as to compile the base portfolio; grouping at a sub-portfolio generator the identified trades into sub-portfolios; determining at a spread value engine a set of allowable spread values for each sub-portfolio; and for each sub-portfolio, generating at a defeasance portfolio engine a defeasance portfolio of swaps comprising at the most two trades, each of the two trades having a spread value selected from the determined set of allowable spread values so that the defeasance portfolio replicates the base portfolio and minimizes gross notional of the defeasance portfolio.

RELATED APPLICATION

This application is a continuation of U.S. patent application Ser. No.12/472,008, filed May 26, 2009, which is based on U.S. ProvisionalPatent Application Ser. No. 61/056,683, filed May 28, 2008, the contentsof which are incorporated herein in their entirety.

FIELD OF THE INVENTION

The present invention relates to a computer system and computersystem-implemented method for defeasance of a financial investmentportfolio, and in particular to automatic defeasance of a portfolio ofcredit default swaps.

SUMMARY OF THE INVENTION

A computer-implemented method for automatic defeasance of a baseportfolio of credit default swaps according to an exemplary embodimentof the present invention, where the base portfolio is held between afirst counterparty and a second counterparty, comprises the steps of:receiving at a portfolio database trade data related to the baseportfolio; identifying from the trade data at a matching engine tradesthat have at least one of matching core attributes and matching tradecharacteristics so as to compile the base portfolio; grouping at asub-portfolio generator the identified trades into sub-portfolios;determining at a spread value engine a set of allowable spread valuesfor each sub-portfolio; and for each sub-portfolio, generating at adefeasance portfolio engine a defeasance portfolio of credit defaultswaps comprising at the most two trades, each of the two trades having aspread value selected from the determined set of allowable spread valuesso that the defeasance portfolio replicates the base portfolio andminimizes gross notional of the defeasance portfolio.

A system for automatic defeasance of a base portfolio of credit defaultswaps according to an exemplary embodiment of the present invention,where the base portfolio is held between a first counterparty and asecond counterparty, comprises: a portfolio database that receives tradedata related to the base portfolio; a trade matching engine thatidentifies trades from the trade data that have at least one of matchingcore attributes and matching trade characteristics so as to compile thebase portfolio; a sub-portfolio generator that groups the identifiedtrades into sub-portfolios of the base portfolio; a spread value enginethat determines a set of allowable spread values for each sub-portfolio;and a defeasance portfolio engine that, for each sub-portfolio,generates a defeasance portfolio of credit default swaps comprising atthe most two trades, each of the two trades having a spread valueselected from the determined set of allowable spread values so that thedefeasance portfolio replicates the base portfolio and minimizes grossnotional of the defeasance portfolio.

According to an exemplary embodiment of the present invention, acomputer system comprises one or more processors, one or morecommunication devices operatively connected to the one or moreprocessors, and one or more computer media, the computer mediacontaining instructions executable on the one or more processors forperforming a method for automatic defeasance of a base portfolio ofcredit default swaps, the base portfolio being held between a firstcounterparty and a second counterparty, and the method comprises thesteps of: receiving at a portfolio database trade data related to thebase portfolio; identifying from the trade data at a matching enginetrades that have at least one of matching core attributes and matchingtrade characteristics so as to compile the base portfolio; grouping at asub-portfolio generator the identified trades into sub-portfolios of thebase portfolio; determining at a spread value engine a set of allowablespread values for each sub-portfolio; and for each sub-portfolio,generating at a defeasance portfolio engine a defeasance portfolio ofcredit default swaps comprising at the most two trades, each of the twotrades having a spread value selected from the determined set ofallowable spread values so that the defeasance portfolio replicates thebase portfolio and minimizes gross notional of the defeasance portfolio.

In at least one embodiment, the matching core attributes comprise atleast one of the following types of core attributes: trade date, side,nominal, underlying name, maturity and currency.

In at least one embodiment, the matching trade characteristics compriseat least one of the following types of trade characteristics: effectivedate, fixed leg, contingent leg and calculation agent.

In at least one embodiment, the step of determining a set of allowablespread values comprises selecting spread values from two or morepredetermined spread values.

In at least one embodiment, the step of determining a set of allowablespread values comprises selecting two predetermined spread values.

In at least one embodiment, the step of determining a set of allowablespread values comprises selecting spread values that correspond torecognized standard spread values.

In at least one embodiment, the predetermined spread values comprise twoor more of the following spread values: 10 bp, 25 bp, 50 bp, 100 bp, 250bp, 500 bp and 1000 bp.

In at least one embodiment, the step of determining a set of allowablespread values comprises selecting spread values that are greater than orequal to a maximum of the following: (i) the predetermined spread valueimmediately preceding or equal to a minimum executed spread on the baseportfolio, and (ii) 50% of an average spread of the base portfolio.

In at least one embodiment, the step of determining a set of allowablespread values comprises selecting spread values that are less than orequal to the minimum of the following: (i) the predetermined spreadvalue immediately following or equal to a maximum executed spread on thebase portfolio, and (ii) 200% of an average spread of the baseportfolio.

In at least one embodiment, the step of generating a defeasanceportfolio comprises, for each sub-portfolio, confirming at averification engine one or more of the following: the defeasanceportfolio has a maximum of two trades, novation of the defeasanceportfolio and termination of the base portfolio does not generatepayments, and the defeasance portfolio minimizes gross notional.

A computer-implemented method for automatic defeasance of a baseportfolio of credit default swaps, where the base portfolio is heldbetween a first counterpart and a second counterpart, comprises thesteps of: sending first signals related to registration data of thefirst and second counterparts to a defeasance portfolio service providercomputer system; sending second signals related to a defeasance dateselected by the first and second counterparts to the defeasanceportfolio service provider computer system; on the defeasance date,sending third signals related to the base portfolio to the defeasanceportfolio service provider computer system; receiving from thedefeasance portfolio service provider fourth signals related to arequest to accept a proposed reconciliation of the base portfoliocomputer system; receiving from the defeasance portfolio serviceprovider fifth signals related to a request to accept a proposeddefeasance of the base portfolio into a defeasance portfolio using theaccepted proposed reconciliation computer system; and receiving from thedefeasance portfolio service provider computer system sixth signalsrelated to a request to confirm defeasance of the base portfolio into adefeasance portfolio using the accepted proposed defeasance.

A computer-implemented method for automatic defeasance of a baseportfolio of credit fault swaps, where the base portfolio is heldbetween a first counterparty and a second counterparty, comprises thesteps of: receiving at a defeasance portfolio service provider computersystem first signals related to registration data of the first andsecond counterparties; receiving at the defeasance portfolio serviceprovider computer system second signals related to a defeasance dateselected by the first and second counterparties; on the defeasance date,receiving at the defeasance portfolio service provider computer systemthird signals related to the base portfolio; sending from the defeasanceportfolio service provider computer system to the first and secondcounterparties fourth signals related to a request to accept a proposedreconciliation of the base portfolio; sending from the defeasanceportfolio service provider computer system to the first and secondcounterparties fifth signals related to a request to accept a proposeddefeasance of the base portfolio into a defeasance portfolio using theaccepted proposed reconciliation; and sending from the defeasanceportfolio service provider computer system to the first and secondcounterparties sixth signals related to a request to confirm defeasanceof the base portfolio into a defeasance portfolio using the acceptedproposed defeasance.

In at least one embodiment, the proposed reconciliation of the baseportfolio is generated by identifying trades within the base portfoliothat have at least one of matching core attributes and matching tradecharacteristics.

In at least one embodiment, the proposed defeasance is generated bygrouping trades within the base portfolio into sub-portfolios,determining a set of allowable spread values for each sub-portfolio and,for each sub-portfolio, generating a defeasance portfolio of creditfault swaps comprising at the most two trades, each of the two tradeshaving a spread value selected from the determined set of allowablespread values so that the defeasance portfolio replicates the baseportfolio and minimizes gross notional of the defeasance portfolio.

In at least one embodiment, the request to confirm defeasance of thebase portfolio comprises data relating to confirmation of one or more ofthe following: the defeasance portfolio has a maximum of two trades,novation of the defeasance portfolio and termination of the baseportfolio does not generate payments, and the defeasance portfoliominimizes gross notional.

In at least one embodiment, the defeasance service provider is anapplication service provider providing services over a network.

In at least one embodiment, the registration data comprises cut-offdates and transaction currencies.

BRIEF DESCRIPTION OF THE DRAWINGS

The above and related objects, features and advantages of the presentinvention will be more fully understood by reference to the following,detailed description of the preferred, albeit illustrative, embodimentof the present invention when taken in conjunction with the accompanyingfigures, wherein:

FIG. 1 is a block diagram of a system for automatic defeasance of a baseportfolio of credit default swaps according to an exemplary embodimentof the present invention; and

FIG. 2 shows the various exemplary calculations made in accordance withan embodiment of the present invention shown in Example 1.

DETAIL DESCRIPTION OF THE PREFERRED EMBODIMENT(S)

The present invention is directed to a system and method for theautomatic defeasance of a portfolio of an arbitrary number of creditdefault swaps (“CDSs”) into a reduced portfolio of CDSs with at most twospread values. In various exemplary embodiments, the spread values areselected to optimally reduce the gross notional of the defeasedportfolio.

As is known in the art of financial investments, a CDS is a kind ofinsurance against credit risk, and is a privately negotiated bilateralcontract between two counterparties. The buyer of protection pays afixed fee or premium to the seller of protection for a period of timeand if a certain pre-specified “credit event” occurs, the protectionseller pays compensation to the protection buyer. A “credit event” maybe, for example, a bankruptcy of a company, called the “referenceentity”, or a default of a bond or other debt issued by the referenceentity. If no credit event occurs during the term of the swap, theprotection buyer continues to pay the premium until maturity. Thus, aCDS is made up of a “fixed leg” of periodic payments made by the buyerof protection and a “contingent leg” of one payment made by the sellerof protection if the reference credit defaults. The premium paid by theprotection buyer to the seller, often called “spread”, is quoted inbasis points per annum (“bps”) of the contract's notional value, and istypically paid quarterly.

In the present description, the term “base portfolio” refers to aportfolio of CDSs negotiated between two counterparties. The baseportfolio may be represented by two separate portfolios, where eachportfolio corresponds to data related to the CDSs within the baseportfolio as collected separately by the two counterparties. Thus, foreach CDS, the buyer counterparty may have purchase data in itsportfolio, and the seller counterparty may have sales data in itsportfolio. Also, in the present description, the base portfolio mayrefer to a single portfolio including data collected from bothcounterparties. The separate portfolios of the counterparties may beheld on a confidential basis.

Also, in the present description, the term “defeasance portfolio” refersto a portfolio generated based on the base portfolio having at the mosttwo trades, where each of the trades in the defeasance portfolio has aspread value selected from a determined set of allowed spread values sothat the defeasance portfolio replicates the base portfolio andminimizes gross notional of the defeasance portfolio.

The counterparties involved in the base and defeasance portfolios of thepresent invention may be any type of entity, such as, for example,commercial banks, insurance companies, financial guarantors and globalhedge funds. Further, the reference entities for the CDSs in theportfolios may be any type of entity, such as, for example, corporationsand sovereign names.

In various exemplary embodiments of the present invention, the CDScontracts within the base portfolio are not limited to a particularnotional value, and may have, for example, notional values within therange of $10 million to $20 million, or notional values that are outsidethis range. The CDS contracts may have the same or different notionalvalues. Further, the pricing of the individual CDS contracts may bebased on any number and variety of suitable parameters, such as, forexample, the likelihood of default, the recovery rate when defaultoccurs, and consideration for liquidity, regulatory, and marketsentiment about the credit. Also, the CDS contracts may have anysuitable maturity, such as, for example, a maturity within the range ofone to ten years, or a maturity outside this range. The CDS contractsmay have the same or different maturities.

FIG. 1 is a block diagram of a system, generally designated by referencenumber 1, for automatic defeasance of a base portfolio of CDSs accordingto an exemplary embodiment of the present invention. The system 1includes a memory 10, a processor 20, a counterparty interface 25, aportfolio database 30, a trade matching engine 40, a sub-portfoliogenerator 50, a spread value engine 60, a defeasance portfolio engine 70and a verification engine 80. The counterparty interface 25, portfoliodatabase 30, trade matching engine 40, sub-portfolio generator 50,spread value engine 60, defeasance portfolio engine 70 and verificationengine 80 may be composed of software components running on theprocessor 20, a plurality of separate hardware components or a singlehardware component, or a combination of hardware and softwarecomponents.

The counterparty interface 25 may include a graphical user interface orsome other type of electronic interface that allows the counterparties90, 92 to communicate with the system 1. The counterparty interface 25may be located remotely from the other system components and be incommunication via a local area network (LAN), such as an intranet, or awide area network (WAN), such as the Internet. Alternatively, thecounterparty interface 25 may be integrated locally to the othercomponents of the system 1. The counterparty interface 25 may provide aseries of fields to be filled in by the counterparties to allow thecounterparties to provide data to the system 1. For example, thecounterparty interface 25 may include a wizard, including a series ofdropdown menus, that assist the counterparties 90, 92 in filling incorrect and complete information within the fields.

In at least one exemplary embodiment of the present invention, thecounterparties are prompted to fill in registration data at thecounterparty interface 25. For example, the counterparty interface 25may request data related to the names and other identifying informationrelated to the counterparties, data related to an agreed-upon defeasancedate and time, data related to specified cut-off dates, and data relatedto transaction currencies. In general, the registration data may provideinformation to allow the system 1 to identify the counterparties uponsigning on to the system 1, as well as general information regarding thedefeasance of the base portfolio between the counterparties.

The portfolio database 30 receives and stores information related to thebase portfolio. In this regard, each counterparty may send data relatedto the base portfolio to the portfolio database 30 through thecounterparty interface 25. In an exemplary embodiment of the invention,the counterparty interface 25 allows each counterparty to upload itsindividual view of the base portfolio, on a confidential basis, to theportfolio database 30 within a time window leading up to the agreed-upondefeasance time. The time window may open, for example, one or morehours before the defeasance time, and the duration of the time windowmay be pre-set either by the counterparties or automatically by thesystem 1.

The trade matching engine 40 reviews and analyzes the two differentviews of the base portfolio as received by the two counterparties. Inthis regard, the trade matching engine 40 may verify certain informationrelated to the trades within the base portfolio. For example, the tradematching engine 40 may verify trade cut-off dates, whether the tradeshave confirmed status, and whether the reference data is valid. Thetrade matching engine 40 may also sort the trades in a certain sequence,for example, first by chronological order, then by underlying name, andthen by nominal amounts, or in some other suitable sequence. Afterverification and sequential ordering of the trades, the trade matchingengine 40 may then match all the trades of the counterparties portfoliosline by line into one base portfolio of bilateral trades. In thisregard, the matching process may review and match trade details by orderof economic importance based on core attributes, such as, for example,trade date, side, nominal amount, underlying name, maturity, andcurrency, to name a few, and/or trade characteristics, such as, forexample, effective date, fixed leg (payment and convention), contingentleg (credit events, borrowed money, deliverable obligations, etc.), andcalculation agent, to name a few.

After the matching process, if trades remain unmatched, the tradematching engine 40 may generate a report for each counterpartyidentifying the unmatched trades. In this regard, an error code may begenerated that indicates the reason for the error, such as, for example,a message indicating that there is no corresponding trade with matchingcore attributes, or a trade reconciled on core attributes does not matchon trade characteristics. If all trades are matched, the base portfolioof bilateral trades may be made available for viewing by thecounterparties through the counterparty interface 25.

The sub-portfolio generator 50 partitions the base portfolio compiled bythe trade matching engine 40 into sub-portfolios of CDSs having matchingcharacteristics. For example, each sub-portfolio may have CDSs that havethe same currency, underlying name, maturity and credit event.

The spread value engine 60 determines a set of allowable spread valuesfor each sub-portfolio compiled by the sub-portfolio generator 50. Theallowable spread values may be determined according to one or moreconstraints, such as, for example, the allowable spread values must beselected from a set of predetermined spread values, the allowable spreadvalues must be greater than or equal to the maximum of (i) thepredetermined spread value from the set of predetermined spread valuesthat immediately precedes or is equal to the minimum executed spread inthe base portfolio, and (ii) 50% of the average spread of the baseportfolio, and the allowable spread values must be less than or equal tothe minimum of (i) the predetermined spread value from the set ofpredetermined spread values immediately following or equal to themaximum executed spread in the base portfolio, and (ii) 200% of theaverage spread of the base portfolio. Any other suitable constraints,including constraints based on any percentage of average spread valueswithin the base portfolio, may be used. The set of predetermined spreadvalues may include, for example, 10 bps, 25 bps, 50 bps, 100 bps, 250bps, 500 bps and 1000 bps, or any other predetermined spread value.

In an exemplary embodiment of the present invention, the allowablespread values may be set to recognized standard spread values. Suchspread values may be recognized by, for example, central clearingexchanges for CDSs that have adopted a standard coupon rate fixed to twolevels (e.g., 100 bps and 500 bps, 50 bps and 100 bps, 500 bps and 1000bps, etc.). The spread value engine 60 may automatically select the twostandard spread values as the set of predetermined spread values.Alternatively, the two counterparties may agree to choose the twostandard spread values as the set of predetermined spread values.

The defeasance portfolio engine 70 generates for each sub-portfolio adefeasance portfolio of CDSs including at the most two trades, each ofthe two trades having a spread value selected from the determined set ofallowable spread values so that the defeasance portfolio replicates thebase portfolio and the gross notional of the defeasance portfolio isminimized. The defeasance portfolio engine 70 may use any suitablealgorithm to determine the optimal spread value and notional for each ofthe two trades. In at least one exemplary embodiment of the presentinvention, the defeasance portfolio engine 70 may use the followingalgorithm for each sub-portfolio:

-   -   Starting from a sub-portfolio consisting of a number N of CDSs        labeled i=1, . . . , N, with notional N_(i) (with N_(i)>0 for        “long protection”, N_(i)<0 for “short protection”) and spread        S_(i), all maturing on the same roll date T, compute the net        notional of the original portfolio

$\overset{\_}{N} = {\sum\limits_{{i = 1},\;\ldots\mspace{11mu},N}N_{i}}$by summing the notionals (with corresponding +/−sign), the net dollarspread of the original portfolio

$\overset{\_}{SN} = {\sum\limits_{{i = 1},\;\ldots\mspace{11mu},N}{S_{i}N_{i}}}$by summing the dollar spreads (with corresponding +/−sign). Then,iterate across all combinations of the following: for all sets of twoallowable spread values S₁ and S₂, taken such that S₁ and S₂ aredifferent, calculate the corresponding notionals N₁ and N₂ of defeasingtrades, according to the formulae

${N_{1} = {{\frac{{S_{2}\overset{\_}{N}} - \overset{\_}{SN}}{S_{2} - S_{1}}\mspace{14mu}{and}\mspace{14mu} N_{2}} = {- \frac{{S_{1}\overset{\_}{N}} - \overset{\_}{SN}}{S_{1} - S_{2}}}}},$where a positive result is a “long protection”, a negative result is a“short protection” and a null result indicates that no CDS is requiredfor defeasance. For each iteration of sets of two allowable spreadvalues S₁ and S₂, the gross notional N_(gross)=|N₁|+|N₂| (equal to thesum of the absolute values of the notionals of the defeasing trades) iscalculated and recorded. After this iteration, the two trades havingcorresponding spread values S1, S2 and corresponding notionals N1,N2that result in the smallest gross notional N_(gross) are retained.

Note that in the above algorithm, if N=1 (i.e., in the case of a singleCDS), the defeasance portfolio engine 70 may generate a defeasanceportfolio of CDSs made up of two trades. In this situation, if thepredetermined spread values are selected so as to correspond to thestandard spread values mentioned above, the single CDS may be defeasedinto two trades, where each of the two trades may have a correspondingspread value selected from the standard spread values. The notional ofthe two defeasance trades may be of the same sign of the notional of thesingle CDS if the single CDS spread value is not outside of the range oftwo standard spread values.

In an exemplary embodiment of the present invention, the system 1 may beused for automatic defeasance of a base portfolio of CDSs so that thebase portfolio may be transferred from one exchange to another. This maybe particularly useful in the case in which exchanges and or conventionswithin various geographical regions (e.g., U.S., Europe, Asia) selectdifferent standard coupon rates. For example, a base portfolio inExchange A having standard spread values may be transferred to ExchangeB having different standard spread values by automatic defeasance of thebase portfolio so that the resulting defeasance portfolio is made up oftrades having corresponding spread values that are appropriate forExchange B.

The verification engine 80 may confirm that the defeasance portfoliohaving at the most two trades provides the necessary results. Forexample, the verification engine 80 may confirm that the defeasanceportfolio has a maximum of two trades, the novation of the defeasanceportfolio together with the termination of the base portfolio generatesneither fixed not contingent payments for any party, and the alternativedefeasance portfolios have a greater gross notional (i.e., thedefeasance portfolio results in the smallest gross notional).

The following example illustrates a computer-implemented method forautomatic defeasance of a base portfolio of credit default swapsaccording to an exemplary embodiment of the present invention:

EXAMPLE 1

As shown in FIG. 2, a sub-portfolio of a base portfolio compiled by datareceived from two counterparties is received as input to the system 1.The sub-portfolio is represented by the sub-portfolio data table 100 inFIG. 2, which includes information regarding each of the trades withinthe sub-portfolio 100. In this regard, within the sub-portfolio table100, each trade may be identified by a “count”, and information such as“notional” and “executed spread” may be included in the sub-portfoliotable 100 for each trade. As shown in the sub-portfolio characteristicstable 110, the overall characteristics of the sub-portfolio isautomatically compiled. The characteristics of the sub-portfolio listedin the sub-portfolio characteristics table 110 includes the averagespread and summed notionals for all long trades, the average spread andsummed notionals for all short trades, the net average spread and netnotional for all trades, the gross average spread and gross notional forall trades, the minimum spread and the maximum spread. A set ofallowable spread values for each defeasance portfolio is then determinedbased on the characteristic data as provided in the sub-portfoliocharacteristic table 110. The set of allowable spread values is providedin the allowable spreads table 120. As shown in the defeasance portfoliotable 130, the sub-portfolio is reduced to a defeasance portfoliocomposed of two trades, each trade having a corresponding spreadselected from the set of allowable spreads and a corresponding notionalso that the gross notional of the defeasance portfolio is minimized. Asshown in the analysis table 140, a reduction analysis is performed forthe defeasance portfolio to determine the reduction factor of thedefeasance portfolio. After iterating through the above steps for eachsub-portfolio of the base portfolio, a portfolio spread X notionalhistogram 150 is generated showing the spread and notional data of eachsub-portfolio as compared to the spread and notional data of thedefeasance portfolio.

Now that the preferred embodiments of the present invention have beenshown and described in detail, various modifications and improvementsthereon will become readily apparent to those skilled in the art.Accordingly, the spirit and scope of the present invention is to beconstrued broadly and limited only by the appended claims and not by theforegoing specification.

What is claimed is:
 1. A computer-implemented method for automaticdefeasance of a base portfolio of negotiated swaps, the base portfoliobeing held between a first counterparty and a second counterparty,comprising the steps of: receiving at a portfolio database negotiatedtrade data related to the base portfolio; identifying from thenegotiated trade data at a matching engine using one or more processorsnegotiated trades that have at least one of matching core attributes andmatching trade characteristics so as to compile the base portfolio;grouping at a sub-portfolio generator using one or more processors theidentified negotiated trades into sub-portfolios; determining at aspread value engine using one or more processors a set of allowablespread values for each sub-portfolio; and for each sub-portfolio,generating at a defeasance portfolio engine using one or more processorsa defeasance portfolio of swaps comprising at the most two trades, eachof the two trades having a spread value selected from the determined setof allowable spread values so that the defeasance portfolio replicatesthe base portfolio and minimizes gross notional of the defeasanceportfolio.
 2. The method of claim 1, wherein the matching coreattributes comprise at least one of the following types of coreattributes: trade date, side, nominal, underlying reference, maturityand currency.
 3. The method of claim 1, wherein the matching tradecharacteristics comprise at least one of the following types of tradecharacteristics: effective date, fixed leg, variable leg and calculationagent.
 4. The method of claim 1, wherein the step of determining a setof allowable spread values comprises selecting using one or moreprocessors spread values from two or more predetermined spread values.5. The method of claim 4, wherein the step of determining a set ofallowable spread values comprises selecting using one or more processorsspread values that are greater than or equal to a maximum of thefollowing: (i) the predetermined spread value immediately preceding orequal to a minimum executed spread on the base portfolio, and (ii) 50%of an average spread of the base portfolio.
 6. The method of claim 4,wherein the step of determining a set of allowable spread valuescomprises selecting using one or more processors spread values that areless than or equal to the minimum of the following: (i) thepredetermined spread value immediately following or equal to a maximumexecuted spread on the base portfolio, and (ii) 200% of an averagespread of the base portfolio.
 7. The method of claim 4, wherein the stepof determining a set of allowable spread values comprises selectingusing one or more processors spread values that correspond to recognizedstandard spread values.
 8. The method of claim 7, wherein the step ofdetermining a set of allowable spread values comprises selecting usingone or more processors two predetermined spread values.
 9. The method ofclaim 1, wherein the step of generating a defeasance portfoliocomprises, for each sub-portfolio, confirming at a verification engineusing one or more processors one or more of the following: thedefeasance portfolio has a maximum of two trades, novation of thedefeasance portfolio and termination of the base portfolio does notgenerate payments, and the defeasance portfolio minimizes grossnotional.
 10. The method of claim 1, further comprising the step oftransferring the defeasance portfolio from a first exchange to a secondexchange.
 11. The method of claim 1, wherein the step of generating adefeasance portfolio is performed using the following algorithm:starting from a sub-portfolio consisting of a number N of swaps labeledi=1 . . . , N, with notional N₁ (with N₁>0 for “payer of the spread”,N₁<0 for “receiver of the spread”) and spread S_(i), all maturing on thesame roll date T, compute the net notional of the original portfolio$\overset{\_}{N} = {\sum\limits_{{i = 1},\;\ldots\mspace{11mu},N}N_{i}}$by summing the notionals (with corresponding +/−sign), the net dollarspread of the original portfolio$\overset{\_}{SN} = {\sum\limits_{{i = 1},\;\ldots\mspace{11mu},N}{S_{i}N_{i}}}$by summing the dollar spreads (with corresponding +/−sign); iterateacross all combinations of the following: for all sets of two allowablespread values S₁ and S₂, taken such that S₁ and S₂ are different,calculate the corresponding notionals N₁ and N₂ of defeasing trades,according to the formulae${N_{1} = {{\frac{{S_{2}\overset{\_}{N}} - \overset{\_}{SN}}{S_{2} - S_{1}}\mspace{14mu}{and}\mspace{14mu} N_{2}} = {- \begin{matrix}{{S_{1}\overset{\_}{N}} - \overset{\_}{SN}} \\{S_{1} - S_{2}}\end{matrix}}}},$ where a positive result is a “payer of the spread”, anegative result is a “receiver of the spread” and a null resultindicates that no swap is required for defeasance; for each iteration ofsets of two allowable spread values S₁ and S₂, the gross notionalN_(gross)=|N₁|+|N₂| (equal to the sum of the absolute values of thenotionals of the defeasing trades) is calculated and recorded; after theiteration, the two trades having corresponding spread values S1, S2 andcorresponding notionals N1,N2 that result in the smallest gross notionalN_(gross) are retained.
 12. A computer system comprising: one or moreprocessors; one or more communication devices operatively connected tothe one or more processors; and one or more computer-readable mediacontaining computer-readable instructions executable on the one or moreprocessors, the instructions being related to performance of a methodfor automatic defeasance of a base portfolio of negotiated swaps, thebase portfolio being held between a first counterparty and a secondcounterparty, comprising the steps of: receiving at a portfolio databasenegotiated trade data related to the base portfolio of negotiated swaps;identifying from the trade data at a matching engine negotiated tradesthat have at least one of matching core attributes and matching tradecharacteristics so as to compile the base portfolio; grouping at asub-portfolio generator the identified negotiated trades intosub-portfolios; determining at a spread value engine a set of allowablespread values for each sub-portfolio; and for each sub-portfolio,generating at a defeasance portfolio engine a defeasance portfolio ofswaps comprising at the most two trades, each of the two trades having aspread value selected from the determined set of allowable spread valuesso that the defeasance portfolio replicates the base portfolio andminimizes gross notional of the defeasance portfolio.